TC 3290 | Or. T.C. | Feb 7, 1994
Plaintiff appeals defendant's assessments of additional excise tax and Multnomah County business income tax for 1983 and 1984. The assessments were based on defendant's finding that plaintiff was a unitary business and required to report its income on an apportionment basis. Plaintiff claims it is a public utility entitled to use a segregated method of reporting.
The merger of the two corporations included some unusual conditions. The board of directors was divided into two executive committees, one for Washington and one for Oregon. As a consequence, the board of directors meets only once each year. The preferred shareholders of the Oregon operation retained the right to elect four directors who must be residents of Oregon. Those four directors, plus two generally elected directors, constitute the executive committee for KATU. Also, the merger agreement provided for separate accounting.
"Insofar as possible for accounting purposes, the books and records of such Division shall be maintained as if said Portland Division had continued operations after January 1, 1967, as a separate subsidiary corporation of this corporation with all allocations of income, expenses and taxes to be made accordingly in accordance with good accounting practices."
"It is understood, however, that in doing so and particularly in view of the fact that the taxpayer's business admittedly involves a unitary operation which normally would lend itself more readily to the apportionment method of reporting, my decision is not intended as a determination with respect to the proper method of reporting for subsequent years."
2. Plaintiff cites Lincoln County v. Dept. of Rev. (TC 2676),
" 'Public utility' means any business entity whose principal business is ownership and operation for public use of any plant, equipment, property, franchise, or license for the transmission of communications, transportation of goods or persons, or the production, storage, transmission, sale, delivery, or furnishing of electricity, water, steam, oil, oil products or gas."
This definition is very broad. It could include such businesses as a car rental company, a heating oil company, a car battery recycler, a bottled water company and perhaps a Turkish steam bath.
Defendant contends the term "public utility" implies a rate-regulated business as is expressly required by the definition of "public utility" in the Multistate Tax Compact, ORS
It is puzzling why the legislature chose such a broad definition. It may have assumed the label "public utility" only applies to regulated companies but the wording of the statute belies such an assumption. Defendant argues that television and radio are specifically mentioned in OAR 150-314.670-A. However that rule lists both rate-regulated *36
and nonregulated businesses. The court finds plaintiff is a public utility within the meaning of ORS
"(1) If a taxpayer has income from business activity as a financial organization or as a public utility (as defined respectively in ORS
314.610 (4) and (6)) which is taxable both within and without this state (as defined in ORS314.610 (8) and 314.615), the determination of net income shall be based upon the business activity within the state, and the department shall have power to permit or require either the segregated method of reporting or the apportionment method of reporting, under rules and regulations adopted by the department, so as fairly and accurately to reflect the net income of the business done within the state."(2) The provisions of subsection (1) of this section dealing with the apportionment of income earned from sources both within and without the State of Oregon are designed to allocate to the State of Oregon on a fair and equitable basis a proportion of such income earned from sources both within and without the state. Any taxpayer may submit an alternative basis of apportionment with respect to his own income and explain that basis in full in his return. If approved by the department that method will be accepted as the basis of allocation."
Plaintiff contends this statute provides the taxpayer a choice of using either segregated or apportionment reporting. Plaintiff argues that neither method is preferred, but the test is which method "most fairly and accurately reflects the net income of business done within the state." Plaintiff acknowledges ORS
Plaintiff misreads the statute. The statute empowers the defendant, not the taxpayer to choose a method of reporting. Significantly, the statute authorizes defendant to exercise that power by rules and regulations. *37
Defendant has chosen to require the apportionment method. Despite the legislature's express exclusion of public utilities from the operation of the Uniform Division of Income for Tax Purposes Act (UDITPA), the effect of defendant's adoption of the rules makes the UDITPA rules applicable to ORS
"For public utilities, other than carriers of freight or passengers and companies engaged in sea transportation services, the three factors ordinarily will be property, payroll and sales."
This is not to say that plaintiff is foreclosed from trying to avoid the three-factor formula apportionment.
"ORS
314.670 provides that if the allocation and apportionment provisions of ORS314.610 to314.665 do not fairly represent the extent of the taxpayer's business activity in this state, the taxpayer may petition for, or the Department may require * * *
"(1) Separate accounting;
"(2) The exclusion of any one or more of the factors;
"(3) The inclusion of one or more additional factors which will fairly represent the taxpayer's business activity in this state; * * *."OAR 150-314.670-A.
Moreover, defendant's own regulation indicates there may be a need to use another method for particular industries.
"In the case of certain industries such as air, rail, or sea transportation, trucking, television, radio, motion pictures, various types of professional athletics, and so forth, the foregoing rules in respect to the apportionment formula do not set forth appropriate procedures for determining the apportionment factors." OAR 150-314.670-A.
Plaintiff believes that this "regulatory provision should tip the balance in favor of segregated reporting," at *38
least in situations like plaintiff's. Despite the fact that the regulation reads like a determination of fact, it has not been construed as such. The Oregon Supreme Court in TwentiethCentury-Fox Film v. Dept. of Rev.,
5. Under its regulatory scheme, defendant has determined that public utilities under ORS
Thus, plaintiff was left with two alternatives. Under ORS
"Any taxpayer may submit an alternative basis of apportionment with respect to his own income and explain that basis in full in his return. If approved by the department that method will be accepted as the basis of allocation."
Although defendant's regulations have not repealed this statute, neither did plaintiff select this approach. Plaintiff did not submit an explanation with its return and, perhaps more importantly, defendant did not approve any alternative method.
Plaintiff's second alternative was to establish the appropriateness of a different method or modification under OAR 150-314.670-(A). In Twentieth Century-Fox Film v. Dept. ofRev.,
A. It fairly represents the extent of the business activity in the state and would not result in more or less than 100 percent of the income being taxed.*39
B. The method would not create or foster a lack of uniformity among UDITPA jurisdictions, and
C. It reflects the economic reality of the business engaged in by the taxpayer in Oregon.
The undisputed facts demonstrate that plaintiff is a unitary business. Accordingly, the test set forth in TwentiethCentury-Fox Film applies to plaintiff. Plaintiff has not passed the test. Rather, it focused its proof on which method more fairly and accurately reflects its net income. The scope of the test is not just net income, but also the extent of business done in the state.
"It is also important to note that it must be established that statutory apportionment does not adequately reflect business activity, not merely that it does not adequately reflect income earned in the state." Twentieth Century-Fox Film,299 Or. 220" court="Or." date_filed="1985-06-04" href="https://app.midpage.ai/document/twentieth-century-fox-film-corp-v-department-of-revenue-1194792?utm_source=webapp" opinion_id="1194792">299 Or at 233 ,700 P.2d at 1042-43.
Plaintiff's evidence does not establish that the statutory apportionment formula fails to reflect its business activity in Oregon. This apparently was by design. Plaintiff states in its reply brief:
"Frankly, the Taxpayer did not seek to utilize an alternative method of apportionment as contemplated by OAR 150-314.670-(A) because it was seeking to use one of the two statutorily prescribed methods of reporting, * * *."
Plaintiff argues that the apportionment formula "unfairly allocates KOMO's larger market profit to Oregon * * *." Again, however, this does not address the extent of plaintiff's business activity in Oregon and whether the apportionment formula fairly reflects that business.
For the years in question, MCBIT followed essentially the same rules that applied to plaintiff for state excise tax purposes. MCBIT adopted ORS
Based on the evidence adduced, the court finds department's Opinion and Order No. 90-0643 must be sustained. Defendant to recover costs and disbursements.